That is according to independent mortgage broker, Private Finance, which has been investigating the cost to borrowers of slipping onto their lender’s standard rate after their initial mortgage deal has finished.
When borrowers reach the end of their introductory offer, they can remortgage to find a better deal. However, if they do nothing, they will automatically start paying their lender’s standard variable rate (SVR), which is generally higher.
Analysis by Private Finance looked at a borrower with a typical loan of £173,677. If they sat on their lender’s SVR for six months or more, paying an average rate of 4.39%, they wold pay £7,549 in annual interest.
But, by switching to a two-year fixed-rate deal at 1.76%, they would pay £3,102 per year in interest – a difference of more than £4,000.
Indeed, if they remained on this SVR for the full 25-year term of their loan they would pay £112,686 in total interest, which represents 65% of their original loan.
While Private Finance said the scenario was hypothetical, the scale of interest – relative to the original loan – would be similar to short-term, high-cost loans such as those provided by Wonga.
Before it went into administration, the average payday loan of £250 would typically earn Wonga £150 – or 60% of the original loan.
While the mortgage sector and the payday loans sector are very different, said Private Finance, this illustrated the comparatively high cost of remaining on an SVR.
Shaun Church, director of Private Finance, said SVRs had always been uncompetitive but with rates falling fast recently, the gulf between SVRs and typical mortgage rates was becoming more obvious.
“Lenders are cashing in on borrowers’ inertia,” he said, “charging rates that are more than two times the rate they would charge to new customers.”
Consider a 10-year mortgage
Church highlighted the potential of 10-year fixed-rate mortgages, which he said required little effort from the borrower but guaranteed a long-term competitive rate.
He added: “Though it is ultimately the borrower’s choice, lenders are making significant profit by punishing customers for being loyal.
“The message to borrowers is clear: don’t fall into the SVR trap and always switch to a more competitive deal once your existing mortgage term comes to an end.
“An independent mortgage broker will be able to advise on the most suitable deal, noting other factors such as product fees and flexibility can be just as important as the headline rate.”
